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Monetary Policy Indicators As Predictors Of Stock Returns

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  • David A. Becher
  • Gerald R. Jensen
  • Jeffrey M. Mercer

Abstract

We explore the linkage between stock return predictability and the monetary sector by examining alternative proxies for monetary policy. Using two complementary methods, we document that failure to condition on the Fed's broad policy stance causes a substantial understatement in the ability of monetary policy measures to predict returns. Industry analyses suggest that cross-industry return differences are also linked to changes in monetary conditions, as monetary policy has the strongest (weakest) relation with returns for cyclical (defensive) industries. Overall, we find that monetary conditions have a prominent and systematic relation with future stock returns, even in the presence of business conditions. (c) 2008 The Southern Finance Association and the Southwestern Finance Association.

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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 31 (2008)
Issue (Month): 4 ()
Pages: 357-379

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Handle: RePEc:bla:jfnres:v:31:y:2008:i:4:p:357-379

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Web page: http://www.southwesternfinance.org/
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Cited by:
  1. Ray Sturm, 2013. "Economic policy and the presidential election cycle in stock returns," Journal of Economics and Finance, Springer, vol. 37(2), pages 200-215, April.
  2. Paul Goebel & David Harrison & Jeffrey Mercer & Ryan Whitby, 2013. "REIT Momentum and Characteristic-Related REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 564-581, October.

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